The comeback after the storm

When Neil Bruce joined SNC-Lavalin in 2013, the Montreal engineering firm was roiled by scandal. Two years after becoming CEO, his $4.1-billion purchase of UK-based WS Atkins—Listed’s 2017 Deal of the Year—turns SNC into a new international giant, focused squarely on the futureBy Robert Thompson

December 13, 2017

All over the map: Before the Atkins deal, SNC-Lavalin was “selectively international,” says president and CEO Neil Bruce. “We wanted to be more global”

No one would be startled to find out Neil Bruce is an engineer by training. He has the perspective one anticipates from an engineer—the attitude that a problem can be solved by simply working it through. Bruce’s background, along with his no-nonsense attitude that comes from an upbringing in Aberdeen, Scotland, makes him perfectly suited to be chief executive of Montreal’s SNC-Lavalin Group Inc. (TSX:SNC), and to pilot the engineering firm from its darkest days and establish the company as a leading force in the sector worldwide.

Which is likely why Bruce wasn’t all that frazzled when his blockbuster $4.1-billion deal to buy United Kingdom-based WS Atkins, in an arrangement designed to make SNC a true global player, leaked to the media in early April, weeks before anyone outside of teams of lawyers and bankers were supposed to know about it. It should have bothered him, given that it moved up his team’s timetable significantly and brought the spectre of other potential rival bids into play. But Bruce, 57, is pragmatic—the leak simply forced his team to react more succinctly and prepare the deal in a shorter period of time. It was, in other words, just another hurdle he and his team could engineer their way out of.

“In essence, all we did was lose a couple of weeks of confidentiality, but it was more of a disruption,” Bruce explains, in an interview from his office in the company’s Montreal headquarters. “It didn’t change the process. We completed everything on the earliest possible date, and that piece didn’t affect the timetable. It just got a lot of people more energized.”

Process. Timetables. Creating structures, both in the business world and in the finance arena—those are areas Bruce keenly understands. The deal to acquire Atkins was calculated, carefully crafted by the leadership team at SNC, a company still recovering from a devastating series of bribery scandals that threatened the firm’s very existence. It is a massive deal—both in value and transformative impact—and for those reasons it has been chosen as Listed’s Deal of the Year for 2017. Acquiring Atkins, a firm with 18,000 employees over several continents, and whose successes include leading the development of the site for the 2012 Olympic Games in London, involved ingenious strategy led by a clever financing arrangement put together by lawyers and bankers on both sides of the Atlantic. It makes SNC a worldwide powerhouse in the engineering space, with more than 50,000 total employees and annual revenue around $12 billion.

“This transaction has the potential to transform SNC-Lavalin into one of the leading engineering consulting firms in the world,” said Michael Sabia, CEO of Caisse de dépôt et placement du Québec, SNC’s largest shareholder and a key financial partner in the Atkins deal, at the time it was announced.

TURNING SNC-LAVALIN into an engineering powerhouse, potentially first in the world, was top of mind for Bruce when he took over as CEO in 2015. He’d come to SNC in 2013, from engineering firm Amec—where he spent 15 years and rose to chief operating officer—just as a series of scandals linked to SNC’s former management were starting to play out amongst law enforcement, regulators and in the courts. Several months earlier, Robert Card had been named CEO. Card replaced interim CEO Ian Bourne, who stepped in when former CEO Pierre Duhaime resigned after disclosure of $56 million in undocumented payments between 2001 and 2011. In early 2013, Duhaime was subsequently charged with fraud over a Montreal hospital contract (a trial is still pending). Around the same time, allegations that SNC had previously bribed public officials in Bangladesh led to a settlement that banned the company from bidding on any World Bank-financed project until 2023. The controversies escalated further in 2014 and 2015—first, when prosecutors in Switzerland grabbed a conviction of another SNC exec who was accused of bribing the son of former Libyan dictator Muammar Gadhafi, and then when the RCMP charged SNC itself with fraud for earlier Libya-related activities.

Against this backdrop, SNC pushed forward under Card in 2014 with the $2-billion acquisition of Kentz Corp., a UK-based oil and gas services company. Bruce, who was heading up the company’s resources, environment and water operations at the time, led that deal. In early 2015, he was named chief operating officer, before being tapped to replace Card in September. After becoming CEO, Bruce continued to look for new targets. He says he considered smaller strategic acquisitions or organic growth to expand, but felt neither of those options played to the company’s strengths. Instead, SNC determined that a larger target with operations in various geographies would be the most beneficial path to follow.

Olympic showcase: WS Atkins’ portfolio included being the lead engineering design firm for the London Olympic games in 2012

With that in mind, Bruce says SNC devised a list of potential acquisitions, but there was no question that WS Atkins, an engineering firm with deep connections in Europe, the U.S. and the Middle East, was the objective. “Atkins was a clear No. 1. We wanted to fill in some regional gaps in order for us to be more global than just selectively international.”

A priority for Bruce was the option to do a “clean deal,” one heavily reliant on having the cash on hand to make an aggressive offer. He felt it would be hard for a board of directors to turn down a cash-heavy proposition, an essential element since SNC wanted to avoid a bidding war for Atkins.

And so the engineering firm’s finance team went to work on a plan. SNC’s balance sheet was in good shape and not heavily leveraged. That led it to consider a mix of selling equity, as well as reaching out to the Caisse for options.

One of the keys was what Stephen Kelly, a partner at law firm Norton Rose Fulbright Canada, which represented SNC, calls “the wild card”—taking a loan against earnings from the engineering firm’s stake in Ontario’s 407 International Inc., a toll highway north of Toronto, as part of a complicated financing structure that also involved a bought deal on the equity markets.

“I’ve been practicing public M&A and securities law for most of 20 years now and this is one of the most innovative and complex financing structures around a major M&A deal,” says Kelly. “And that’s a positive thing.”

Some industry watchers felt SNC should sell its lucrative 16.8% stake in the 407, but Bruce and his team were reluctant to let go of a terrific asset. “There was a lot of debate about whether we should sell the 407 to take the strategy forward,” Bruce says. “We spoke to [the Caisse] about moving forward with the next piece of our strategy. Is there a way to finance this? Our shares in the 407 are worth a lot more than the loan [we wanted]. That led to the conversation about securing a loan against the cash flows of the 407.”

Eventually the financing was structured to tap a variety of sources, including an $880-million public bought deal offering of subscription receipts, a concurrent $400-million private placement of subscription receipts with the Caisse, as well as $800 million from a combination of a new unsecured term loan with a group of banks as well as SNC’s existing syndicated credit facility.

But the key was a $1.5-billion loan from the Caisse to SNC-Lavalin Highway Holdings Inc., the entity under which SNC’s 407 stake is held.

Emmanuel Pressman, a partner at Osler, Hoskin & Harcourt in Toronto, worked alongside UK-based Slaughter and May as part of the team representing Atkins. He says the deal demonstrates the critical importance of robust and creative financing as Canadian companies search outside of our borders for potential deals. He adds that the ability of SNC to raise money on the equity markets also shows there is investor support for such arrangements. “Strategic growth opportunities for dominant, large cap, Canadian-based, global businesses are fewer and far between,” he says. “It goes to show that in a global market where so much capital is chasing a finite number of deals, businesses remain driven by growth strategies.”

The Caisse declined Listed’s request for comment on the deal, but Sabia said in a statement at the time of the purchase that the arrangement offered “financial flexibility” to SNC. “The structure of la Caisse’s financing helps protect its capital and allows it to benefit from the future performance of the company, which is now even better positioned
thanks to this acquisition,” Sabia said.

Wild card: SNC used its share of toll revenue from the Highway 407 in Ontario to backstop a loan from the Caisse on the Atkins deal

Bruce says the Caisse’s confidence in SNC and the company’s leadership grew after the success of the Kentz deal. In the end, the 407 arrangement worked for both organizations.

“If we went down the traditional route with a bank, a bank would want some form of pledge of shares or ownership,” Bruce says. “We were able to construct a deal with CDPQ where effectively their recourse on all of this is the cash flows from the 407.”

Analysts were very positive on the move.

RBC analyst Derek Spronck noted the 407 loan still allows SNC to sell the highway if needed. “Such a structure does not hinder SNC’s ability to sell its [stake] in Highway 407 ETR,” Spronck says. “Nor does it limit its ability to benefit from any upside to 407 International dividends.”

BRUCE MADE AN overture to Atkins about a possible deal in early March. Soon, they had a non-binding agreement in place. Then, on April 3, news of the arrangement leaked out.

Norton’s Kelly knew something was wrong immediately. “I was on a different telephone call and my phone began to ring a lot,” he says. “[SNC’s] general counsel was calling to say there was a leak—and though there was only a non-binding offer at that point, UK rules require significant disclosure when there’s been a leak.”

That meant SNC had to halt its stock and issue a statement, while Atkins basically had to disclose most of the details of the proposed deal. It presented an opportunity for another suitor to emerge (Atkins had been a rumoured target of another global firm in January), though in the end that failed to occur.

“It pushed the timeline very hard,” Kelly says. “That complicated financing structure is something we effected in 17 days. [The completed deal was announced on April 20.] You take that complexity, the cross-border component, the UK disclosure rules, the Canadian financing—that was a lot of stuff to put together by a dedicated team in a very short period of time.”

As for whomever leaked the information that SNC was pursuing Atkins, Bruce didn’t really bother worrying about it. By that point he was too busy making sure his deal would move forward. Why dwell on the past, he says, when the future has its own set of challenges you can actually influence?

One of the reasons SNC was able to recover from the leak so quickly was that Bruce had assembled the same tried-and-tested acquisitions team that had helped put their Kentz deal together three years earlier. While the Atkins deal was larger, it had many of the same markings as the Kentz acquisition. For one thing, Kentz was also UK-based, so that meant utilizing cross-border legal and finance teams.

“It was about the individuals,” says Bruce. “We got the same Norton Rose people in the UK. We used Kevin Smith at RBC who leads the M&A piece in the UK. We used the same companies for the London-facing and Canadian backup on finance, but also exactly the same people.”

There was one key change, too. One of SNC’s leaders in the Atkins acquisition was Christian Brown, who was the CEO of Kentz when SNC bought it. Bruce’s reasoning for involving Brown, who now heads SNC’s oil and gas division, was simple—having gone through a similar process only a few years earlier, he’d have a thorough understanding of what worked and what could be improved in the process. Brown understood the challenges, and complexities, as well as any issues around integrating the businesses after the deal was complete.

“It was a really good team,” Bruce says. “I liked what they did the last time and it was an opportunity to learn lessons from the Kentz deal. You don’t often get the chance to replicate something.”

While the Kentz deal was “90% perfect,” says Bruce, he recognized there were elements that could be improved upon. One of his most important takeaways from the Kentz acquisition was the speed with which SNC sought to nail down cost and revenue savings. It was tackled too quickly, Bruce says, overlooking the effect it had on Kentz’s employees. With that in mind, Bruce’s team was a little less tactical and a little more social in its approach to dealing with Atkins’ engineers.

When the deal was completed, the SNC team spent more time engaging Atkins’ employees, something Bruce was convinced would create a smoother transition in the long run. After all, the key asset being acquired was the 18,000 personnel.

“A vast majority [of what you are acquiring] is people,” Bruce says. “And spending more time, getting them involved and allowing them to be part of that thought process and solution, generally you get everyone to the right place—give or take. And that’s a better place. People feel more engaged.”

THE RESULT OF the deal, which closed at the start of July, repositions SNC in a variety of markets, Bruce says. The deal effectively doubles SNC’s footprint in the U.S., UK and Scandinavia, and adds resources in Asia and the Middle East. SNC is now the largest Canadian employer operating in the UK, Bruce says. The key is that Atkins fits into the initial stages of projects, something lacking at SNC prior to the deal, Bruce said, and as a consulting engineering firm, everything is paid on a fee basis, which takes risks out of the equation for SNC.

“The skills and capabilities we acquired are right at the front end of the sectors we already operated in—infrastructure, oil and gas, and power, specifically nuclear,” Bruce says. “They were already in a big chunk of what we did. But they were right at the front end, which SNC-Lavalin didn’t do. We tended to come to the value chain a little further down the end.”

As with any transaction of this size, all eyes are now shifting to the integration process, near-term results and any unforeseen surprises. There is some concern, for example that in its quest to nail down a deal, SNC might have paid too much. In a Morningstar Equity report, author David Silver notes that while the acquisition furthers SNC’s goal of becoming a full-service operation, it “seems to come at full price and may limit returns on capital and near term value creation.”

SNC said in July that it expects to realize $120 million in cost savings due to synergies—$30 million from SNC and $90 million from Atkins—by the end of its first full year of operation. It repeated its commitment to this target when it released its third-quarter results in early November. Those results included a 21% increase in revenue but a smaller-than-expected profit due to costs related to the Atkins deal. The company’s shares took a small hit as a result.

Perhaps the most significant development to date came a week later, when SNC announced in a release a wholesale “strategic realignment of our global organizational structure.” Highlights there include the creation of four new business sectors—oil and gas; engineering, design and project management; nuclear power; and clean power. Three other sectors—infrastructure; mining and metallurgy; and capital—continue as before. Atkins will continue to report as a single sector until the end of 2017, when the new alignment kicks in. In terms of personnel, the reorganization saw the appointment of Nick Roberts, CEO of Atkins UK and European business, as leader of the new engineering sector. On the other hand, Heath Drewett, Atkins’ former group finance director, who played a key role in negotiating the deal and was named president of Atkins in July once it had closed, will be leaving for a new job in the UK in the new year.

These changes reflect Bruce’s view that the Atkins acquisition completed a missing part of the SNC puzzle. Now, with resources to tap into in a wide variety of countries and geographies, as well as depth in a number of key business areas, the company is moving forward. He dismisses the disruption caused by SNC-Lavalin’s scandals, saying he wants the company to put it in the rearview. The scandal is the past and acquisitions like Atkins provide the path ahead.

“What a customer wants, start to finish—I think we have that now,” he says.